Lord Abbett & Co, the mutual fund company, filed a securities fraud lawsuit against Valeant on Wednesday alleging that it bought the drug giant’s debt securities at an artificially high price because of misinformation provided by Valeant. The suit, filed in federal court in New Jersey and alleging violations of New Jersey’s racketeer influenced and corrupt organizations (RICO) law, represents a new and potentially costly legal attack on Valeant, which is already facing lawsuits over alleged manipulation of drug prices.

By invoking the RICO law in New Jersey, the location of Valeant’s U.S. headquarters, Lord Abbett could seek a penalty three times as large as the losses it allegedly sustained from the decline in Valeant’s share price. Federal securities laws don’t allow investors to invoke national RICO laws in comparable shareholder suits.

Various parties have filed RICO suits against Valeant, but only over allegations that the company defrauded them through deceptive business practices, such as overcharging them for drugs. The losses claimed in those RICO cases, in the hundreds of millions of dollars, are small compared with the total of $80 billion in investor losses claimed in Lord Abbett’s RICO suit. The existing securities fraud cases against Valeant, which claim a comparable total of investor losses, don’t contain the RICO threat of treble damages.

If other investors were to follow Lord Abbett’s lead, Valeant’s legal exposure could balloon. In its filings with the Securities and Exchange Commission, Valeant says that the class action suits are without merit and that it intends to fight them.

Legal Challenges

It’s impossible to estimate how much Valeant will ultimately pay out as a result of its voluminous legal entanglements, which include Justice Department and regulatory probes and lawsuits alleging it defrauded its clients and shareholders.

The new RICO suit could add new pressures to a company that admitted accounting improprieties in 2015 and is grappling with $28 billion in debt. Under an agreement with lenders, Valeant doesn’t need to deduct from its earnings any legal costs up to $500 million in any 12-month period, as long as no single charge exceeds $250 million. Any amount paid to Lord Abbett or other plaintiffs above those figures would reduce earnings as calculated by debt holders.

At the end of the last quarter, Valeant had $162 million reserved to cover “probable and estimable” legal liabilities, settlements and other matters, according to its most recent quarterly filing.

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How was Lord Abbett able to file suit in Federal court while invoking NJ's RICO statutes? The answer - the suit can be filed in federal court as long as the NJ RICO claims are anchored to federal claims - can be found on the Sargent Shriver National Center on Poverty Law's website under the section "Federal Practice Manual for Legal Aid Attorneys":

In 1990, Congress enacted the supplemental jurisdiction statute, 28 U.S.C. § 1367, which largely codified, with certain critical distinctions, the former common law doctrines of pendent, ancillary, and pendent-party jurisdiction. When applicable, these doctrines permitted the federal court to take jurisdiction over state law claims over which there was no independent basis of jurisdiction so long as they were anchored to a claim in the action over which federal jurisdiction was appropriate.